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Limited Liability, Moral Hazard and Risk Taking A Safety Net Game Experiment

Author

Listed:
  • Tibor Neugebauer,
  • Sascha Fullbrunn

    (LSF)

Abstract

We model the safety net problem as a social dilemma game involving moral hazard, risk taking and limited liability. The safety net game is compared to both an individual decision task involving full liability and the deterministic public goods game. We report experimental data to show that limited "liability leads to higher risk taking in comparison to full liability;" nevertheless, the difference is much smaller than predicted by theory. In the safety net game, subjects behave as if socially responsible for the losses they impose on the group. With repetition, nevertheless, a gradual emergence of the moral hazard problem arises.

Suggested Citation

  • Tibor Neugebauer, & Sascha Fullbrunn, 2012. "Limited Liability, Moral Hazard and Risk Taking A Safety Net Game Experiment," LSF Research Working Paper Series 12-12, Luxembourg School of Finance, University of Luxembourg.
  • Handle: RePEc:crf:wpaper:12-12
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    References listed on IDEAS

    as
    1. Di Mauro, Carmela, 2002. "Ex ante and ex post moral hazard in compensation for income losses: results from an experiment," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 31(3), pages 253-271.
    2. Simon Gächter & Manfred Königstein, 2009. "Design a Contract: A Simple Principal-Agent Problem as a Classroom Experiment," The Journal of Economic Education, Taylor & Francis Journals, vol. 40(2), pages 173-187, April.
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    Cited by:

    1. Staněk, Rostislav & Krčál, Ondřej & Čellárová, Katarína, 2022. "Pull yourself up by your bootstraps: Identifying procedural preferences against helping others in the presence of moral hazard," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 98(C).
    2. Wang, Jian & Iversen, Tor & Hennig-Schmidt, Heike & Godager, Geir, 2017. "How Changes in Payment Schemes Influence Provision Behavior," HERO Online Working Paper Series 2017:2, University of Oslo, Health Economics Research Programme.
    3. Gortner, Paul & Massenot, Baptiste, 2020. "Leverage and Bubbles: Experimental Evidence," SAFE Working Paper Series 239, Leibniz Institute for Financial Research SAFE, revised 2020.

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    More about this item

    Keywords

    Forthcoming: Economic Inquiry;

    JEL classification:

    • C9 - Mathematical and Quantitative Methods - - Design of Experiments
    • D7 - Microeconomics - - Analysis of Collective Decision-Making
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • H4 - Public Economics - - Publicly Provided Goods
    • I1 - Health, Education, and Welfare - - Health
    • I3 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty

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